Public funding for sports facilities: a velodrome version

In recent days I (rather unexpectedly, I must confess) made front page news in Whanganui with my comments about the proposal to roof the aging velodrome in the city.

This is not a new story. The velodrome was built in Whanganui in 1995 and at the time it was built there were people saying that it needed a roof to future proof it and protect it from the elements. There has been a concerted effort by a group of dedicated campaigners to push for local, regional and now central government funding for the roofing project. The reality is that the wooden velodrome track is in need of replacement - so this is now bundled into the roof project. 

When I was asked late last week to comment on the latest proposal, I was told about an economic impact study that had been commissioned to calculate the benefits of the facility. I have been unable to obtain a copy of this study, but several results from the study were published in a full page advertisement in the local Whanganui Chronicle last week. Thus my comments could not specifically address the claims made in the study. I did, however, offer some more general comments on what I was aware of.

Research into sports facility construction in New Zealand has shown that there is an absence of detectable economic outcomes in host cities that build new facilities. There is very little evidence that predictions of economic impacts prior to facility construction actually materialise post-construction. There is a perception that these figures (NZ$176 million over ten years in Whanganui, according to facility proponents) will add to the local economy - and that when put side by side with the proposed NZ$26.3 million cost of the facility, well, it's a no-brainer, right? Who'd be stupid enough to argue that the benefits are smaller than the costs?

There are more than a few reasons why the benefit/cost comparison is not as simple as it looks at first glance.

What is the area where the impact is calculated for? Regional impacts are larger than city-level impacts by virtue of the fact that regions are larger and any multiplier effects are larger than for cities. This isn't immediately obvious.

Also, economic impacts are not the same thing as benefits. Producers of goods and services sold in Whanganui to visitors to town for events need to pay their bills - and quite often this involves having to pay for imported components of what they produce. The appropriate measure to be used is value added - once all of the imported costs are paid, what fraction of total spending is a true addition to the local economy? It is much, much less than the sum total of visitor spending.  

Without verification of the study and the method used, it is difficult to comment specifically on whether the numbers are accurate and/or reasonable. But they are a projection - and they need to be discounted due to the fact that they occur over time (the simple fact is that a dollar today is always worth more than a dollar next year). Assuming they are discounted, the events used to generate these benefits need close scrutiny. Are the attendance figures realistic? Visitor spending is the key component of such studies - so how many visitors have been assumed will be attending these expected events? And how much will they be spending? These will all be approximations. 

Are the events hosted "new" events? That is, are they events that would not otherwise have been hosted in the city in the absence of a roofed facility? I noted in the prospectus that the facility has a range of configurations, one of which is for opera. The Whanganui Opera House (a specialist operatic venue with ideal acoustics) is a stone's throw from the velodrome. I realise this is but a single instance, and a roofed facility would seat more people - but is there a market locally (and wider) for large-scale opera? Are there other events that would also have been hosted by other facilities in Whanganui that the roofed velodrome would now host? This has the effect of reducing the expected benefits to the city as a whole. Again, in the absence of an economic impact study, it is hard to know exactly how large this effect is or might be.

Likewise, a roofed Whanganui velodrome could potentially attract events from other places, like those hosted in Palmerston North's Arena. If this was the case, then from a Horizons (Manawatu-Wanganui Regional Council) perspective, there would be no net benefit as it would simply be hosted in another city in the region. 

It is also claimed by proponents that the economic pay back period for the roofed velodrome would be less than two and a half years. To use an example of an older and larger facility - the 34,500 seat Wellington Regional Stadium (formerly known as Westpac Stadium and now known as Sky Stadium) was opened in 2000 and cost then NZ$122 million. It attracted a significant number of new events to the city, including the World Rugby Sevens, among other events. It was generally regarded as a successful facility - and while it has been able to maintain breaking even from a year-to-year operations point of view, it is still (after two decades) yet to pay back the original construction cost - despite a study that showed an increase in visitor spending of almost NZ$500 million in its first ten years of operation. 

There are more than a few reasons, therefore, to be somewhat skeptical of claims like those mentioned in the advertisements. 

There is also no mention of whether or not the facility will actually cost the Whanganui City or Regional Council to operate. Dunedin's facility is an example of a facility that at least initially required the Dunedin City Council to subsidise the facility in order to break even operationally. 

Last, but certainly not least, there's the old economist's chestnut of opportunity cost. In this case, a roofed velodrome paid for by central government is a net injection of funding to the area - but any contribution to the project by the Whanganui City Council (and/or Horizons Regional Council) will come with an opportunity cost - the next best alternative of this funding. If there are more pressing projects to fund locally, the benefits from these projects will be the opportunity cost of the velodrome project for Whanganui. Essentially it comes down to priorities - if the velodrome is the top priority, the opportunity cost will be less than the benefits associated with the project.

All this, of course, doesn't mean that stadiums should therefore never be built. One might well argue that stadiums are built irrespective of the views of economists like me, and turn out to be successes. People in host cities are often very proud of their facilities, and that's a legitimate benefit to local citizens. Ultimately it can come down to whether or not the local population believe that the price to pay for the facility is worth it. If it is, then it becomes a reality, and it is hard to refute.

If, however, one attempts to justify this decision by using the economic numbers before and after, this is a much more difficult proposition to defend. 

After all, if it was commercially viable to roof the velodrome in 1995, it would have been roofed at the time. There's a reason that these facilities are not privately owned and operated. 

Christchurch stadium debate

Time for a random blog post ...

After the publication of an opinion piece in this morning's Press (no prizes who came up with the headline), I've jotted down a few more thoughts in response to some of the other stories that have been published in recent times.

Some question whether the logic applied to stadiums (and the outcome) means that other publicly-funded facilities like infrastructure (sewerage, roading, etc), libraries, museums, churches, etc, would also fail a benefit-cost test and therefore shouldn’t be funded. I would argue that critical infrastructure projects have higher benefit to local residents than a sports facility by simple virtue of the fact that these projects are necessities – people who live without sewerage and adequate roading will know what an inconvenience it is not to have them. The value of such projects is high – and so there can be a higher cost attached to them for the projects to make economic sense. For things like museums and libraries, the same logic applies. What is the benefit of a library to a local populace? If people value the amenity, then there is a cost that is potentially commensurate with that value and it can be considered to pass the benefit-cost test if the cost is less than the benefit.

A key difference between infrastructure projects as well as amenities like libraries, museums, etc and sports facilities is that those who advocate for the importance of “cultural” amenities often don’t tie the value of the amenity to the (potential) impact resulting from spending from visitors to the city – which is a staple (and sizeable) component of advocacy documents produced routinely for sports facilities. A supermarket generates visitor spending. Does that mean supermarkets should be publicly funded?

The issue I have is not that Christchurch doesn’t need a new stadium – it is rather that public money from local, regional and central government is being poured into something that may end up costing more over time than the benefits accruing from the facility to the local population.

There is no question that Christchurch needs a sporting/events facility. The temporary facility in operation since 2011 hasn’t prevented some acts (Bruce Springsteen, for one) from coming to Christchurch. People still watch rugby at the temporary facility. Has the Christchurch economy collapsed in the absence of events that they could have hosted? No. The local population gets on with things. You can’t miss what you never had. And sport in Christchurch continues to be played – a testament to the “can do” resilience of sport.

Who should be responsible for funding the construction of a new facility, and how big should it be? The CCC has said that a $253 million facility is insufficient. So they instead advocate for a facility costing just under twice that price while knowing that there’ll be an almost $250 million shortfall – and saying that central government should pay the difference.

What is wrong with an open air “provincial stadium” that seats 17,500 people (with temporary seats added it will increase in capacity)? Surely it is likely to be better utilised locally than a facility that seats 25,000? And who says a roof is a "must have" for stadiums in this country? There’s only one roofed stadium in New Zealand – so the sample size from which to draw conclusions is pretty small. We’ve had outdoor facilities for as long as we’ve been a nation. Do we really need a “one size fits all” solution in the form of an expensive roofed facility that can “do it all”?

Here’s an idea. Why not build an affordable smaller outdoor facility for sport – and also build a covered arena-type facility (like Auckland’s Spark Arena) for the indoor aspects like concerts, trade shows, beer fests etc? It would probably be quite a bit cheaper to do things this way – it would almost certainly cost less than $496 million.[1] Plus, you get two facilities for less than the price of one – and facilities that are arguably better suited to their purposes than a single facility. Sport would get an intimate venue that is likely to be better utilised (from the point of view of having near-full capacities) and have more atmosphere (which is what spectators at an event often value) than a much larger (and less utilised) venue. An indoor arena would be tailored for concerts, trade shows, etc without the complexity of a larger facility with a removable turf. For those that argue that a new indoor arena is unnecessary as the Horncastle Arena already exists for that purpose, then that's fine - more money saved!

A small stadium is a stupid idea, you say – it immediately rules out All Blacks tests. But how often does an All Blacks test occur in a city? And when it does, to what extent does the local population actually benefit? (Sounds like a future research project - might keep me busy over summer!) The Crusaders and Canterbury rugby will still play there every season – which is arguably more important to Christchurch residents than an All Blacks test every two years. And the vast majority of the proposed event calendar in a new facility are locally-oriented. Surely this means that a locally-oriented facility makes sense from an operational perspective?

In the wash up, the true benefit and value of a stadium to a city is largely the value that people in a city place on having it. If an All Blacks test is something than Christchurch residents value above all else, then by all means Christchurch residents (via rates) should fund the construction of a facility to host this type of event. The benefit will justify the cost.

Should central government fund any shortfall? Only if having a Christchurch facility makes the rest of the country demonstrably better off. Is this likely to be the case? If Christchurch is competing with other cities for the same events, then the argument is likely to be no. It is akin to taking money off one city and giving it to another.

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[1] A crude back of the envelope calculation: Westpac Stadium and Spark Arena were built at twice the cost, it would come to $432 million.

It's on (without government funding)!

It's on, folks! December 10 at Vector Arena - Joseph Parker fights for the WBO world heavyweight title against Andy Ruiz.

In the end, it didn't need government funding either! Although Martin Snedden, CEO of promoters Duco (as reported in the media) was bullish about whether the announcement yesterday justified the call of the Government to not fund the fight:

"That's rubbish. When we started out on this commercial route only 35 days ago we had no commercial contracts in place. We didn't know what would happen. We trusted our loyal sponsors and supporters but we were asking a lot of them... but we've hit a threshold in terms of risk assessment where we are saying that we're prepared to go for this."

Their initial threshold might well have included government funding as a buffer of sorts, but even without government funding, they've decided to make a go of it with private funding. Kudos for going for it despite the risk, but that's the nature of private enterprise - you'd be doing pretty well if your business was a sure thing.

Now that it is confirmed, expect it to cost New Zealanders to enjoy a piece of the action. Duco have already said that it won't be available to view at rock bottom prices.

Duco are a shrewd bunch of people who know their boxing and know how to run a fight night. This will likely be their biggest opportunity to make something of Joseph Parker's title ambitions in this country. If he wins, he may well seek bigger opportunities that the market in this country may be unable to support. (I won't think about if he loses - except to say that David Tua was still a popular fighter in this country after his title fight loss to Lennox Lewis and his fight with Shane Cameron was the biggest fight in this country prior to what will go down on December 10, 2016.)

As a boxing fan, I am right behind Parker in his goal to win the title. As to whether that will extend to parting with any of my scarce income ... let's wait and see.

The Parker fight takes another body shot

Just as it seemed things were becoming clearer regarding the Joseph Parker fight ... then comes news today that Auckland City's ATEED have decided against providing ratepayer funding for the fight.

According to the article, ATEED's contribution was expected to be in the hundreds of thousands of dollars.

The CEO of ATEED, Brett O'Riley said:

"While there is clear potential to generate international exposure if the fight is held in Auckland, we are unable to make a robust assessment of the potential of this event until the fight is confirmed to take place here and domestic and international television rights are secured."

It is a body blow to promoter Duco's chances of hosting the event in Auckland - especially since it appeared that it was banking on ATEED's financial support to make the fight happen.

Of the public funding possibilities, ATEED's support appeared most sensible on the surface from an economic perspective - the benefits of the fight were likely to be highly concentrated in Auckland - even with up to 50% of fight attendees hailing from outside the city (as claimed in the article). Auckland was also the most likely beneficiary of national and international broadcasts - although the value of this publicity is far from certain. Given that the length of time to promote the fight is shrinking by the day (the fight was believed to be scheduled for December 10), the ability to market and sell the fight becomes that much more difficult the closer we get to fight night.

O'Riley was also quoted as saying:

{I}it was not clear if staging the fight in Auckland would have "the desired outcomes of Auckland's Major Events Strategy" so the decision was made "not provide financial sponsorship for the fight."

It definitely looks like the fight has become a political hard sell - and without government backing it now stands as a true test of whether there is a market of sufficient size to make such an event commercially justifiable in New Zealand.

Pondering pugilistic price discrimination .... maximising the value of the world title fight

News today revealed that Joseph Parker's WBO world heavyweight title fight against Mexican opponent Andy Ruiz will take place in Auckland on December 10 at a venue to be decided. The fight will take place without central government funding in big a about-turn from last week's announcement from Parker's promoters Duco when they withdrew their application for government funding that the fight was 80% likely to head offshore.

It is not 100% privately funded, though. One of the backers of the Parker camp is the Auckland City events arm ATEED, so there are already taxpayer dollars being funneled into the fight.

Now that the fight is taking place in Auckland, the question becomes whether the fight will generate economic benefits for the city and for New Zealand. In short, the benefits are likely to be confined to Auckland city and are not likely to spill over outside the city boundaries. The extremely short-term nature of the event itself will likely mean that any impact is short and sharp - don't expect longer-term economic impacts - even if Parker happens to win the fight. We can also expect the promoters to attempt to extract as much of the local consumer benefit in the form of higher broadcast prices and ticket prices. This isn't extortion or in any way unfair - it is market forces at work. Duco is a monopolist here - and they have the ability to set the price people must pay to see the fight. Parker vs Ruiz will be the biggest and most important fight ever staged in New Zealand, and people will be willing to pay to watch it. David Tua vs Shane Cameron was a big fight in New Zealand and attracted a huge amount of interest - this fight will be even bigger.

There is an interesting option that is on the table for Duco that they have already done but now that the stakes are as high as they have ever been (for boxing promoters in New Zealand), do they have the same willingness to test the market's willingness to pay for this fight? That option is perfect price discrimination - something that Duco did for Parker's fight with Carlos Takam in May of this year. This was labelled by promoter Dean Lonergan as

"an entertaining experiment in microeconomics"

In the Takam fight, Duco auctioned off 520 general admission tickets at $1 reserve on TradeMe. The intention of this experiment was an attempt to eliminate the possibility of scalping occurring with these tickets - people buying cheap and selling at higher prices.

With interest in this fight likely to be significantly greater than what it was for the Takam fight, it will be very interesting to see if Duco try it again. If anything, they have more to gain from giving it another go - one would expect the willingness to pay for a title fight to be much greater than for a build-up fight. Yet there is always a risk that they may not make the money that they are seeking - but they are likely to sell the tickets and fill the venue. At the same time, charging a fixed price is not a sure bet either - people might decide that the price is simply too steep and there could be empty seats as a result. There is also the possibility that the price might be set too low - and scalping could occur.

That they have already tried the auction method is a credit to the promoters. Only they will know whether it paid off last time. It would be fascinating to see Duco try this again because of the potential gains the practice offers them as sellers of a sought-after commodity (which are potentially much higher with this fight). Even if it was for a small proportion of tickets, it is a way of letting the market decide what the ticket is worth.

Lonergan also mentioned that

"You'd never get the New Zealand Rugby Union doing what we're doing because they'd see it as too controversial". 

This is Duco's version of a top-tier All Blacks test - their World Cup final - will they be game enough to roll the dice once more?

Funding the fight ... low blow or a knockout?

The proposal for Government funding to be poured into Joseph Parker's world title fight has become very popular - so popular, in fact, that even I've been asked to contribute to this discussion!

There have been plenty of views from both sides of the fence - Steve Kilgallon's piece on why taxpayers should stump up to help stage the fight, Patrick Gower's views are more strongly against, while Barry Soper writes a more questioning piece.

Eric Crampton (as per usual) makes several excellent points - his whole post is worth a read! As economists, Eric and I see very much eye to eye on this issue.

I can only really add to this discussion with a few points of my own:

• A matter of a week or so ago, Auckland was widely considered the host. Now we are told that there is only a 20-30 percent chance of the fight being staged in Auckland. What is the situation that has caused this uncertainty? This, to me, is the key question. Why is the government funding needed? Could it be that promoters in the US are proposing to spend more on attracting the fight than Duco, and are therefore being considered as a safer (read: more lucrative to the WBO) bet than hosting a title fight here? Government funding has been used the world over to try to trump others in hosting events ... with questionable returns.
• Indeed, there is little to no evidence from the independent research looking at the realised economic impacts of mega sporting events that said events will generate tangible economic impacts. The winners from such arrangements tend to be the governing sporting bodies, followed by the event organisers - with taxpayers a distant last.
• What are the benefits that New Zealanders will enjoy from hosting the fight? Benefits will accrue largely to those who watch the fight - and you can bet that it will not be anywhere in the plan for such an event to be broadcast live free-to-air. Part of what makes the fight commercially lucrative is the ability of broadcasters to charge for people to watch it. If government funding was contingent on it being broadcast free-to-air, it would undermine the commercial viability of hosting it here. So it should be a given that people will have to pay to watch the fight with or without government funding. These prices will be much more expensive than any previous fight given its title status, so one would reasonably expect the promoters to capture a much greater share of the event's benefits in the form of ticket sales and pay-per-view sales from Sky. 
• The economic benefits are (unfortunately) synonymous with economic impacts - which doesn't help the case for the fight to be publicly funded. If you look at past events funded by the Major Events Development Fund (MEDF), they've tended to be events with longer than a single day's duration - which means that their ability to attract visitors and spending is much greater than a one-day event. Any economic impacts from the event are also highly likely to be concentrated in Auckland - hence there may well be a stronger case for Auckland Council (via ATEED, one assumes) to be a major backer of the event. I understand that ATEED is already involved, but it doesn't appear to be enough to get the deal over the line. 
• There is also a matter of consistency and transparency regarding the treatment of the application for the MEDF - any (perceived or otherwise) favouritism will not go down well with people who have missed out in the application stage. One assumes that the application will include an estimate of economic impacts attributable to the event? To support these impacts, it is useful to consider what would happen in Auckland (and New Zealand) if the event did not take place. In most cases, projections of economic impact assume that the counterfactual is that there would be no spending at all in the absence of the event - an assumption that overstates the likely economic impact.
• One must also factor in the opportunity cost of public funding into such an equation. Scarce government funds could be spent elsewhere - and no doubt there are plenty of alternative uses for an as-yet unknown amount of public money that may generate greater longer-term impacts than funding a one-off event like this.
• From what we have heard (at least via the media) the good people at Duco are pointing to the feel-good factor as being an important reason why we should consider funding the fight. If so, ask yourself this - will you feel any worse than you already do if the fight was to go offshore? And if so, what is this "feel-bad" worth to you? In several studies from overseas that have attempted to quantify (among other things) the feel-good effect, intangible benefits are almost always smaller than the economic impacts and are certainly not large enough on their own or in tandem with tangible benefits to justify subsidies given to sports events, facilities or franchises. 
• And what about the precedent a favourable fast-tracked decision would set? 

I'm just finishing off research into the impacts of hosting major sporting events on travel service exports in New Zealand - and preliminary results are interesting. The larger the event, the greater the likelihood of a statistically significant bump in tourism spending - but not all of them have generated positive changes to tourism spending.

I'm a boxing fan from a long way back - I remember growing up watching great fights like "Marvelous" Marvin Hagler vs Thomas "Hitman" Hearns, as well as watching heavyweight greats like Spinks, Tyson, Holyfield, Bowe, Lewis and the Klitschko brothers (among others). I'd love nothing more than to see Joseph Parker added to the list of world champion heavyweight boxers. But as for government funding of this title fight - well, let's just say that the economics of hosting the fight just don't seem to be strong enough to score a win on the cards from this judge. 

The economics of the America's Cup - did we lose or win?

Six months ago Team New Zealand lost the America's Cup Oracle defended the America's Cup in an historic comeback. Since then, we've had a post-mortem of the event, and today we've heard from an independent report into the economic outcomes of the Government's investment into the unsuccessful Team New Zealand challenge off San Francisco. It's being regarded by the Minister for Economic Development as money well spent. Click here for the reports themselves from the MED website.

“The economic benefit from our investment in Team New Zealand is considerable. From a $36 million investment, the evaluation shows a total estimated impact of $87 million to the New Zealand economy,” Economic Development Minister Steven Joyce says.

The Government's share of the total Team NZ revenues of approximately $180m was 20 percent (it was capped at $36 million), with 66 percent coming from overseas. The report found that the total outcome of $87 million to the New Zealand economy would not have occurred without the Government's involvement.

I'm not going to question the final point - it isn't unreasonable to assume that the Government's contribution was pivotal to the challenge - but then, one could also argue that it wouldn't have happened without the overseas or private domestic funding either. That being said, however, there are two aspects of this report that do require challenging.

First, attributing the entire economic impact of a project to a 20 percent contribution is something I (and many others) have a real problem with. You could just as easily credit the economic impact figure of $87 million to the overseas funding (and you could do so with confidence, as it is 'new money' and thus more likely to be beneficial to the New Zealand economy) more than the Government's investment. Still, it is not an easy issue to resolve. It's not as easy as saying that because the Government contributed 20 percent means it should be 'credited' with 20% of the economic impact. The combination of public and private funding makes attributing the economic impact to one or the other parts problematic. A more accurate statement would be that the entire project (regardless of where the money came from) generated $87 million in impacts. After all, the tax revenues generated by Team New Zealand were between $38 and $40 million.  

The second issue is the absence of opportunity costs of public funding in the report, which would help us to determine to what extent the $87 million impact be considered an economic benefit, and therefore money well spent. If there was no Team New Zealand, would nothing have happened? Of course not - life (and the economy) would have continued to tick away as per usual. $36 million of taxpayers money went into this campaign. Public funding has alternative uses, which should at the very least be considered as part of an objective analysis. If there was no Team New Zealand, what would have happened to the $36 million in taxpayer funding that was invested there? Chances are it would have gone to some other worthy recipient, for example the health sector or the education sector. In order to determine whether the $36 million spent on the America's Cup was money well spent, we need to know what $36 million would do when put to an alternative use. If the $36 million for Team New Zealand returned a higher impact than, say, paying each and every New Zealander $8 as compensation for there being no Team New Zealand, then it might have been money well spent. Determining what the appropriate alternative use for $36 million is the subject of debate - and my example above is very much tongue in cheek - but one thing is for sure: it is certainly not nothing. 

$87 million is the economic impact with no alternative use of public (and other) funds. Is it realistic to attribute this as a benefit? I'll let you be the judge of that.

To challenge for or defend the America's Cup - which is better economically?

They say that a week is a long time in sports. This has never been so true as what has developed out off the coast of San Francisco this week. The Oracle Team USA syndicate have almost pulled off one of the greatest comebacks in sports history in rattling off six consecutive wins to tie the regatta and bringing the battle for the Auld Mug down to a winner-take-all race tomorrow morning (NZT).

This time last week it seemed that an Emirates Team New Zealand victory was assured and that we'd be hosting a regatta to defend the Cup in Auckland in about three year's time. Now the tack has changed considerably - this from today's New Zealand Herald: it would appear that the chances of a future New Zealand challenge for the Cup (should Oracle win the final race tomorrow) look set to take a massive hit.

Team chief executive and fundraising power source, Grant Dalton, has already hinted that he will not do another America's Cup challenge if this one fails, though such decisions are always open to review. If he goes, there are doubts that multi-millionaire benefactor Matteo de Nora will continue either.

 ... 

 Lose, and Government money becomes harder to prise out of the public coffers. This year's nail-biting Cup match has been tremendous theatre but it will make the private fundraising job that much harder. One America's Cup lost campaign allows hope to burn. Two lost campaigns raises the issues in sponsors' minds of throwing good money after bad.

Think about this from New Zealand's perspective. We've had the theatre, and the drama, and the world's eyes are now firmly fixed on San Francisco as Oracle seeks to finish what would be nothing short of a miracle, being virtually dead and buried a week ago. Think of the advertising this is giving this country - granted, it would be nicer if we were not on the wrong end of the comeback, but it is publicity all the same, and publicity that likely would not have occurred if we had won the Cup earlier in the regatta. Now the US have something to talk about with this regatta - and it is synonymous with New Zealand. So we get this advertising benefit (which is difficult to quantify but is nonetheless part of the package). How much has this cost the taxpayer? The Government committed about NZ$40m to the TNZ challenge - and are now reaping the rewards of that investment.

What happens if we win it? Several things, possibly; one of which is that there are fair questions to be asked as to whether hosting an event such as the America's Cup is the goldmine people say it could be (I blogged about this earlier in the week). We also know that the Government has in the past expressed an interest in throwing more cash at a Cup defence - for what might be considered fairly obvious reasons - and New Zealand taxpayers are not averse to more dollars being committed to a future defence. The question must be asked as to whether the return on the investment in a defence is as great as the return on the investment for a challenge? If there's one thing to be said for a challenge, it is that the Government writes a cheque for a fixed amount - end of story. A defence is more likely to be accompanied by a blank cheque - much like we had for the Rugby World Cup, where the loss was expected right from the start, on top of government spending towards stadiums, infrastructure, security and the like. Right now, we're getting great intangible mileage out of a $40m taxpayer investment - would we get such mileage if we hosted the event? Is that $40m better spent elsewhere? Important questions that need answers.

Finally, if Oracle does complete its staggering comeback tomorrow, keep a very close eye on the Auckland and New Zealand economies in three years time, to see whether the loss of the Cup has a detrimental impact. I'd be prepared to bet that there won't be a slump or the like if the Cup is hosted elsewhere. After all, you can't miss what you never had. Life goes on. And so does the economy.

Hosting major sporting events such as the America’s Cup – can we believe the hype?

As a general rule, in the words of Public Enemy: don't believe the hype. Hosting a major sports event is a complex situation from an economic perspective – and there’s a lot of unknown that can quickly turn conservative estimates of impact into grossly overstated figures. Here are a few thoughts as they come to mind.

Firstly, we have to recognise that the figures publicised whenever a major event such as the America’s Cup is announced are gross economic impacts, which are not the same thing as economic benefits. The initial economic impact figure posted for the 2013 San Francisco regatta and pre-event regattas was US$1.4b (for San Francisco – click here for the report) and was based on an estimated 15 syndicates competing for the Cup. In March of this year the figures were revised downwards to US$900m – but it is not known how many teams this figure was based on. These figures are impacts associated with the event in the absence of any alternative activity that might have occurred in the absence of the event. In isolation, they are difficult to prove or disprove. In order to determine whether the event is beneficial for a local economy, one has to compare the impact of hosting the event with the likely impact on the local economy if the event was not hosted. It does not necessarily translate that the local economy will be worse off if an event is not hosted – several studies in the scholarly literature have shown that events such as lockouts, and strikes in professional sports in the US have had no impact on host economies – that is, people find other things to spend their entertainment dollars on instead of professional sports.  If US$1.4b or more (in regular tourism, for example) would have occurred in San Francisco in the absence of the America’s Cup, then the decision to host the event would be debatable if the goal is to maximise economic benefits.

Another thing to remember is that these figures are produced by consultant reports that commonly overestimate the positive aspects (like numbers of visitors attending, the extent of their spending, etc), understate or completely omit the costs associated with the event (or, worse, include costs as part of the economic impact), and as such produce numbers that are optimistic at best and gross exaggerations at worst.

The calculation of economic impacts quoted in the media are almost always taken from an economic impact study, which is an input-output analysis that basically calculates the impact of an injection of spending in a local/regional/national economy as it filters through the event-related sectors of the economy. The logic of such impacts, at first glance, appear sensible, but when one examines exactly how the hosting of a major sporting event can impact upon tourism, you quickly realise that it isn’t as straightforward as it might seem.

There are many things that can affect the extent to which an event attracts visitors and their spending. There are positive and negative impacts here. Firstly, the positives. Events attract people who come specifically for the event, and they can also induce tourists to stay longer to take in the event. They can also induce locals to change their holiday plans to attend the event and spend money locally that would otherwise have been spent outside the local area. We can’t ignore the negatives, though. Events can cause visitors to put off trips to the local area – either temporarily (where the trip is displaced to another time) or permanently (known as crowding out) – due to perceptions of event-related congestion, noise, price increases, etc. These same perceptions can also induce locals to flee the area while the event is on, which adds to a possible negative impact. Questions have to be asked of the figures quoted – do they factor in all of these possibilities, and are they reasonable grounds upon which to base estimates of visitor spending?

Estimating visitor spending, too, is an inexact science. A vivid illustration of this was the experience of the 2011 Rugby World Cup. The RWC got considerably more visitors than expected (over 133,000 according to Statistics New Zealand), yet visitor spending was less than half ($340m) of what the Reserve Bank projected ($700m – a figure that was estimated on fewer visitors). This example shows that there’s a lot of unknown – but what is generally known is that projections of impacts very rarely (if ever) turn out as expected.

A report written by the Budget and Legislative Analyst for the City and County of San Francisco Board of Supervisors in November 2010 – click here for the document - determined that the hosting of the current America’s Cup regatta would result in a net cost to the city and county of US$42.1m. In other words, the revenues accruing to the city were in all likelihood more than offset by the costs to the city. This report was based on the initial $1.4b economic impact figures, and was based on the early assumptions of large numbers of syndicates competing to challenge for the Cup. Modifying this to what we have seen unfold recently, fewer syndicates meant lower event-related costs, but also meant lower revenues, so it would be fair to assume that there’d still be a substantial shortfall in the local government coffers as a result of the event. One issue that has been prevalent in San Francisco is the issue of private funding of the event. The bottom line is that the city is on the hook for any shortfall of private funding, which if eventuated would increase the cost to the city of San Francisco (i.e. the taxpayers).

And another thing: what can past experience teach us of the legacy of the New Zealand hosting of the America's Cup regattas in 1999/2000 and 2002/2003? The legacy effect of events is the new buzzword in event evaluation, and is largely unknown as it occurs at some stage in the future, which is of course yet to unfold. I will have to go back to the original economic impact analyses done for the two regattas hosted in Auckland to examine the extent to which legacy played a role in these figures, but one thing in particular strikes me as ironic about the legacy of the 1999-2003 New Zealand America's Cup regattas - and it is the investment in the infrastructure associated with the event. The Viaduct Basin underwent a major transformation to host the two regattas, and Auckland now faces the prospect of developing a new location for the event, with the Viaduct reportedly out of commission for hosting syndicates in a future regatta. Some might say that the development of a new base for the event is a benefit - one which comes at a cost (likely to be borne by Auckland ratepayers) - but in actual fact is already part of a pre-existing development plan of the Auckland waterfront - one which will gain significant traction should New Zealand win the America's Cup off San Francisco in the coming days. As such, the development of a new base is a classic case of a future investment brought forward. As such, calling it a benefit associated with hosting the America's Cup is a little misleading. Then again, is it not unfair to label one legacy of the America's Cup regattas in Auckland as a cost, not a benefit, in the form of further taxpayer funding? After all, the past two unsuccessful America's Cup campaigns have received central government funding. A future defense, should things go to plan, has already reportedly drawn support from the Prime Minister towards some contribution from the public purse. This is all part of a legacy, is it not?

So what about the winners and losers from hosting events?  The nature of the event plays a big part as to who stands to benefit from its hosting. You only had to read the reports in the news media of the impacts of the 2011 Rugby World Cup on the tourism sector in the different regions of the country. Some said it was great, others said it was terrible. For the America’s Cup, it will be largely localised in Auckland, as it has been in the past. Industries directly and indirectly associated with the event (boat building, super-yachts, etc) did well the last time it was hosted in Auckland. As far as tourism-related industries are concerned, anecdotal feedback from cafes and restaurants around the 2000 America’s Cup regatta and the 2011 RWC found that if businesses located in the ‘right’ areas (i.e. Viaduct Harbour for the America’s Cup, fan zones for the RWC) then there were definitely positive impacts, whereas those located outside these areas found that they were flat or even lost business. Evidence suggests that the gains that to be had from hosting an event almost certainly come at the expense of others. The question is whether or not the gains outweigh the losses – and is a part of the big question: whether benefits of hosting events outweigh the costs.

How to get ahead in the NRL - have government work for you

Yesterday was an intriguing end to the 2012 NRL season, with a grand final spectacle befitting of the season finale. (For a review of the game, read this from Phil Gould). The two teams contesting the final, the Melbourne Storm and Canterbury-Bankstown Bulldogs, were ranked 2 and 1 in the minor premiership (or the regular season as it is referred to in North American circles) respectively. Both clubs have a rather colourful recent history, as both have been found to have committed major breaches of the NRL's salary cap within the last ten years, although there is no question here of salary cap impropriety this season. The past just added to the sub-plot of the game itself.

I came across this article by regular Sydney Morning Herald columnist Roy Masters yesterday which gives an insight into how success can be obtained in the NRL.

In short, the Bulldogs signed their present coach Des Hasler from Manly-Warringah, who had just won the 2011 premiership via Hasler's coaching. Hasler is regarded as cutting-edge in his coaching, and he transformed the Bulldogs from 10th place (out of 16 teams) in 2011 to minor premiers and grand final runners-up in 2012. The 'Dogs train at their spiritual home of Belmore Sports Ground. Part of the reason for their transformation:

The $9 million Belmore facility was built with funding from three sources - the Rudd Infrastructure program, a NSW government grant and a $1 for $1 spend with the local council. The Bulldogs contributed $500,000.

That's not a bad price to pay for success. 5.6%. Says it all really. The article also highlights the role of high performance centres (or otherwise) in other clubs, including Melbourne, Gold Coast and Brisbane.

This quote in the article, from Bulldogs CEO Todd Greenberg is also rather insightful:

''When you are limited by the amount you can spend on players via a salary cap, you've got to look at other means of acquiring an edge,'' he said. ''In the case of Des, the Centre of Excellence wasn't opened when he visited. It took 12 months to build and we moved in in November. But he could see we were committed to resourcing long-term success. It also allows me to run my business model off the back of the football department. Fans want to know their club is a better than even shot of winning, plus they want to know we have done everything possible to make this happen.'

Including getting your fair share of government assistance.